NIKE, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended February 28, 2023. Unaudited results; dollar amounts are in millions unless noted. Comparisons are with the same prior-year periods unless stated otherwise.
Business context and results
NIKE designs, markets and sells athletic footwear, apparel and equipment worldwide through wholesale partners and NIKE Direct, including owned stores and digital channels. Management’s strategy emphasizes consumer connections, digital and owned retail, and selected wholesale partners. NIKE Direct represented about 45% of NIKE Brand revenue in Q3.
- Q3 revenue rose 14% to $12,390; growth was 19% excluding currency changes. Nine-month revenue rose 11% to $38,392; currency-neutral growth was 19%.
- Q3 NIKE Brand revenue increased 14% reported (19% currency-neutral); Converse revenue increased 8% (12% currency-neutral). Nine-month increases were 11% and 5%, respectively, reported.
- Q3 regional revenue: North America $4,913, EMEA $3,246, Greater China $1,994 and APLA $1,601. Greater China declined 8% reported in Q3 and 9% for nine months; currency-neutral results were up 1% and down 2%, respectively.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $12,390 | $10,871 | $38,392 | $34,476 |
| Gross profit | $5,371 | $5,067 | $16,697 | $15,976 |
| Gross margin | 43.3% | 46.6% | 43.5% | 46.3% |
| Net income | $1,240 | $1,396 | $4,039 | $4,607 |
| Diluted EPS | $0.79 | $0.87 | $2.57 | $2.85 |
- Q3 income before tax fell 12%; nine-month income before tax fell 6%. Nine-month effective tax rate rose to 18.5% from 12.7%, mainly due to less favorable stock-compensation tax benefits and a shift in earnings mix.
- Q3 selling and administrative expense increased 15% to $3,959; nine-month expense increased 11% to $12,003. It equaled 32.0% of Q3 revenue and 31.3% of nine-month revenue.
- Q3 gross margin contracted 330 basis points; nine-month margin contracted 280 basis points. Higher product, freight and logistics costs, promotional activity and currency effects weighed on margins; strategic pricing and product mix partly offset these pressures.
- Operating cash flow for nine months was $3,588, versus $4,037. Capital expenditure was $700. Cash and equivalents ended at $6,955, down from $8,574 at May 31, 2022; short-term investments were $3,847, down from $4,423.
- At February 28, total debt was $9,425 ($500 current and $8,925 long-term); cash and short-term investments totaled $10,802. Inventory was $8,905, up from $8,420 at May 31, but management said it declined sequentially during Q2 and Q3.
- Cash used in financing was $5,266, including $4,101 of share repurchases and $1,488 of dividends. Nine-month repurchases covered 38.4 million shares. No borrowings were outstanding under the $3 billion commercial-paper program or committed credit facilities at quarter-end.
Material changes, outlook and risks
- Management attributed strong reported and currency-neutral sales growth to product demand and growth across most regions, while Greater China remained comparatively weak amid COVID-related disruptions. Most stores there were open with improved traffic from January 2023.
- Inventory arrived earlier than planned as transit times improved, leaving elevated stock. NIKE reduced purchases and increased promotions; management expected inventory and seasonal product flows to normalize by fiscal year-end.
- Management expected Q4 promotional activity to continue and product costs to remain elevated, potentially extending gross-margin pressure. It also expected unfavorable currency movements, net of hedges, to hurt Q4 results. The filing gives no specific numerical revenue or earnings forecast.
- Currency translation reduced reported revenue by about $549 in Q3 and $2.5 billion for nine months. Management estimated currency effects and related foreign-exchange gains and losses reduced income before tax by about $147 in Q3 and $508 for nine months.
- NIKE completed the sale of its Argentina and Uruguay entities in Q2. The transaction produced an approximately $550 loss, including $389 recognized primarily in fiscal 2020. The distributor-model transition in the territory is expected to reduce reported revenue growth, with a potential longer-term benefit from lower selling and administrative costs and reduced currency exposure. The Chile sale was completed in Q1.
- Risks cited include inflation and interest rates affecting consumers, excess inventory and obsolescence, promotional intensity, reduced wholesale orders or cancellations, supply-chain costs and disruptions, currency volatility, and possible renewed COVID-related disruption.
- NIKE disputed Belgian customs claims for alleged underpaid duties on imports beginning in fiscal 2018; it could not estimate a loss range, and an adverse outcome could materially affect results, financial position or cash flows. The company also disclosed a Netherlands State Aid tax investigation and ongoing tax audits.
- The filing reports no material change in previously disclosed risk factors and no material off-balance-sheet arrangements. Management said disclosure controls were effective as of February 28, 2023. A new $1 billion 364-day credit facility, with a lender-approved increase option to $1.5 billion, was entered into on March 10, 2023, after quarter-end.
Important facts for investors to verify
- Whether inventory normalizes by fiscal year-end and the extent of continued promotions, markdowns or inventory reserves.
- Whether Q4 foreign-exchange headwinds and elevated product, freight and logistics costs further reduce gross margin.
- Greater China demand recovery and the performance of digital and wholesale channels across regions.
- The final financial and growth effects of the Latin American distributor transitions, including the Argentina and Uruguay sale loss.
- Developments in the Belgian customs claim and tax matters, including the Netherlands investigation and U.S. IRS audit.
- Cash generation relative to buybacks, dividends and capital investment, and any changes in debt, ratings or access to funding.